FREE Case Review (866) 588-0600

Cashing Out Vacation Time in California: Rights & Options

In California, cashing out vacation time is generally allowed, but it depends on the employer’s policies and the terms of the employment contract. California labor laws mandate that accrued vacation time is considered a form of earned wages, and as such, it must be paid out to employees upon termination of employment, whether voluntarily or involuntarily.
Awards & recognition
C.L. Mike Schmidt Published by C.L. Mike Schmidt

Key Employee Vacation Rights in California

• Earned vacation time is considered wages and cannot be forfeited
• Unused vacation must be paid out upon employment termination
• No legal requirement for employers to offer vacation time

What You Need to Know: While California doesn’t mandate vacation benefits, if offered, they’re protected by law. Accrued vacation is treated as earned wages, doesn’t expire, and must be paid out when employment ends.

PTO Payout California

In California, employers have no legal mandate to offer paid or unpaid vacation time to their employees. However, if a company does provide paid vacation, specific regulations come into play regarding how it should be administered.
According to California law, accrued vacation time is viewed as earned wages, accumulating as employees perform their duties. For paid time off (PTO), any earned vacation days are considered permanent in California. They don’t expire, and departing employees are entitled to receive payment for any unused vacation time upon leaving the company.
For instance, if an employee earns two weeks (equivalent to 10 work days) of vacation annually, they accrue five days after six months of work. Vacation pay accumulates over time and cannot be forfeited, even upon termination of employment, regardless of the circumstances.
Unless otherwise stipulated by a collective bargaining agreement, upon termination of employment, all earned and unused vacation must be paid to the employee at their final pay rate.
The California legislature, in order to ensure that vacation plans were fairly and equitably handled, provided that the Labor Commissioner was to “apply the principles of equity and fairness” in resolving vacation claims.

How to Calculate PTO Payout

To calculate PTO payout, follow these steps:

1. Determine unused PTO hours

  • Check employee records for accrued, unused PTO

2. Calculate hourly rate

  • For hourly workers: Use their standard hourly rate
  • For salaried workers: Divide annual salary by 2,080 (work hours per year)

3. Compute gross payout

  • Multiply hourly rate by unused PTO hours

4. Apply tax withholding

  • Subtract 22% for supplemental income tax

Here’s a comparison of hourly vs. salaried PTO payout calculations:

Step Hourly Employee Salaried Employee
Rate $15/hour $60,000 ÷ 2,080 = $28.85/hour
PTO 30 hours 30 hours
Gross $15 × 30 = $450 $28.85 × 30 = $865.50
Taxes $450 × 0.22 = $99 $865.50 × 0.22 = $190.41
Net $450 – $99 = $351 $865.50 – $190.41 = $675.09

Remember, PTO payout timing depends on state laws and company policies. Some states require payout upon termination, while others allow annual cashouts or PTO conversion programs.

Ensure compliance with local regulations and proper tax withholding when processing PTO payouts.

How Can I Cash Out My Vacation Time in California?

According to SCLG, when it comes to your vacation time, you can cash it out while you’re still employed or decide to leave your job [1].

This process, often called a “PTO cash out,” allows you to receive payment for unused vacation days, as vacation time is considered a form of wage under California state law. Whether you resign, get terminated, or quit, you’re entitled to this payout, which must be included in your final paycheck.

There are two main scenarios where you can cash out your vacation time: upon termination or resignation or while you’re still employed with the company. Regardless of the circumstances, your payout for unused paid time off (PTO), including vacation time, must be calculated at your final pay rate.

Since California treats vacation time as a form of wage, employers are legally obligated to compensate you for any owed wages upon departure, regardless of the reason. This payout should be made immediately in your final paycheck, covering your last pay period up to termination.

In cases where final wages are not paid promptly, the employer may be subject to a waiting time penalty, which could amount to your daily pay for each day the final wages are late, up to 30 days.

However, if a collective bargaining agreement covers you, the terms of the agreement dictate how unused PTO is paid out.

Alternatively, you and your employer may have arrangements to cash out accrued vacation time while you’re still employed, typically outlined in your employment contract or company policies.

Regardless, you are entitled to payment for your accrued vacation time. They are a form of wage that you have earned. Employers are forbidden from taking vacation time back. They also cannot take away vacation time as a punishment for other workplace misconduct. Vacation time in California also does not “expire.” This means that “use it or lose it” vacation policies are forbidden in the state.

If your employer violates any of these regulations regarding vacation time payout or usage, you have the right to take legal action under California’s wage and hour laws to recover any unpaid wages.

Does California have a “Use it or Lose it” Vacation Policy?

According to Nolo, in contrast to certain states, California prohibits implementing “use-it-or-lose-it” vacation policies [3].

Such policies mandate that accrued vacation time must be utilized by a specified deadline, typically by the year’s end, or it is forfeited. Because accrued vacation is regarded as earned wages, “use-it-or-lose-it” policies are deemed unlawful as they entail withholding owed wages from employees.

However, employers in California have the discretion to establish a cap on vacation accrual. This means that once employees reach a predetermined number of days, their vacation accrual halts until they utilize some of their accrued time off.

This approach lets employers exercise some control over vacation accrual and prevents employees from accumulating excessive vacation time.

While there’s no set number for a permissible cap, the California Department of Labor Standards Enforcement (DLSE) – the agency that enforces California wage and hour laws – has provided some guidance. The DLSE has held that a vacation cap could be no less than 1.75 times the annual accrual rate.

However, the DLSE has since withdrawn that bright line rule and only states that the cap must be “reasonable.” While a 1.75 cap is probably still the safest ratio, a 1.5 cap may also be within legal limits. The example below shows how the vacation cap works.

Related Articles:

See all related hourly worker wage dispute lawsuits our lawyers covered so far.

Get a Free Lawsuit Evaluation With Our Lawyers

The Litigation Group at Schmidt & Clark, LLP is an experienced team of trial lawyers that focuses on the representation of plaintiffs in lawsuits. We are handling individual litigation nationwide and currently accepting new legal challenges in all 50 states.

If you or a loved one was involved with these matters, you should contact our law firm immediately for a free case evaluation. You may be entitled to a settlement by filing a suit and we can help.

References:

1. https://www.shouselaw.com/ca/blog/cash-out-vacation-time-california/
2. https://www.ptogenius.com/resources/blog/pto-payout-what-when-how
3. https://www.nolo.com/legal-encyclopedia/california-rules-vacation-paid-time-off.html

Free Confidential Case Evaluation

Verified 100% Secure SiteTo contact us for a free review of your potential case, please fill out the form below or call us toll free 24 hrs/day by dialing: (866) 588-0600.